What is a SMSF Loan?

A SMSF loan is a home loan that uses the assets within the SMSF to purchase investment property. The returns on the investment, whether through rental income or capital gains, are funnelled back into the super fund.

The Pros and Cons of SMSF

Pros

• Tax effective: your SMSF is taxed at 15% which is far less than the average marginal tax paid by the majority of workers.
• Purchasing power: By combining your super with other members (i.e. Husband, Wife, Family) this boosts you potential to purchase property.
• Business Benefit: You can purchase a commercial property and lease back to your own business (you can’t do this with residential property).
• Control over investment: you have effective control of your SMSF and therefore control the strategy and investments.

Con’s

• Lack diversification: Typically, your average SMSF will have just one or two large assets. This lack of diversification opens up risk to that class of asset and the lack of diversification may not be suited to the SMSF members.
• No personal benefit: Everything must be done via an “arm’s length’ transaction and you cannot purchase from, sell to, rent to a related party.
• Cash Flow: While you can borrow to buy property, you cannot borrow to renovate, build, or improve the property. Therefore, you need to make sure you have sufficient cash to cover these costs.
• Liquidity: When your superfund transfers to the pension phase there needs to be enough cash to fund the required pension without risking having to fire sale the asset.

How does a SMSF Loan Work?

Your SMSF wants to buy property (residential or commercial real estate) but does not have enough funds for the full purchase. The SMSF can now make an equity contribution on the property and borrow the remainder of the funds to complete the purchase. The following diagram illustrates how your SMSF can purchase property.

What is the Process and what is Required?

• Establish your SMSF: with the power to:
  • purchase real estate,
  • borrow money, and
  • mortgage property to secure repayment of that borrowing.
• Obtain Loan Approval: we recommend a SMSF loan “pre-approval” prior to exchanging contracts and paying a deposit.
• Establish the Bare Trust Deed: It is important that the SMSF Trustee is NOT the Property Trustee. The Property Trust Deed can be established once the ‘pre-approval’ is obtained.
• Formal Purchase Contract: When contracts are exchanged or made unconditional between the seller as vendor and the bare trustee as purchaser, the deposit will be paid by the SMSF.
• Valuation & Formal Loan Approval
• Mortgage Documents
• Settlement

If you or anyone you know think they may be interested in a SMSF loan please get in contact today. We can help guide you through the process.